In focus

Net zero and multi-asset: what the transition means for portfolios

Asset owners are no strangers to targets; setting them, managing against them and revising them over time.

Our idea of a ‘sustainability budget’, which we introduced in March 2019, is such an example. It relates to the percentage of relevant sustainable capital allocation to target in a portfolio.

At that time, we talked about the journey that asset owners would need to take to increase this target.

Now, asset owners and investment managers find themselves having to set new targets and think about replotting their journey. This time they need to consider applying a ‘carbon budget’ to target net zero emissions from their assets by 2050 or sooner.

While Schroders has committed to net zero by 2040, asset owners will need to set their own targets, which may be more or less ambitious.

In this paper we seek to outline how we – as multi-asset managers – have thought about the decarbonisation journey from a practical portfolio perspective. We cover four main areas of discussion:

  1. Recognise the path is different from the target. Net zero is a target, while decarbonisation is a path. We think it is important to frame portfolio actions in terms of decarbonisation.
  2. Decide what and how to measure. Which assets, if not all, should be included in the measurement of portfolio emissions? What is the scope of included emissions at the asset level? We think that all assets should be included, scope 1, 2 and 3 emissions should be considered, and a forward-looking view of implied temperature rises should also be taken
  3. Set a decarbonisation trajectory. What are the trade-offs involved? Decarbonising too slowly risks higher physical and transition costs of climate change, while decarbonising too fast risks compromising the investment integrity of a portfolio
  4. Take practical steps to stay on the path and meet the target. We believe that investing in positive climate solutions and engagement is more important than offsets, but recognise that for some asset classes/sectors there will be limited choice currently.

At the end of the paper, we outline a case study of a large asset owner in Europe that has been addressing the issue of decarbonisation from a total portfolio perspective.

Please find the full paper below.